Suppose Universal Bank holds $100 million in assets, which are composed of the following:
Required reserves:..........................$10million
Excess reserves: ............................$ 5million
Mortgage loans:............................$20million
Corporate bonds:...........................$15million
Stocks:.......................................$25million
Commodities:..............................$25million
a. Do you think it is a good idea for Universal Bank to hold stocks, corporate bonds, and commodities as assets? Why or why not?
b. If the housing market suddenly crashed, would Universal Bank be better off using a mark-to-market accounting system or the historical-cost system?
c. If the price of commodities suddenly increased sharply, would Universal Bank be better off using a mark-to-market accounting system or the historical-cost system?
d. What do your answers to parts (b) and (c) tell you about the tradeoffs between the two accounting systems?